ADTRAN Holdings, Inc.

Ladies and gentlemen, thank you for standing by and welcome to EdTrans pre-announcement of financial results for the third quarter of 2021 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. To ask a question during the session, you will need to press star 1 on your telephone keypad. please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. During the course of the conference call, at TRAND, representatives expect to make forward-looking statements, which reflect management's best judgment based on factors currently known. However, These statements involves risk and uncertainties, including the spread and impact of the COVID-19 pandemic, the ability of component supplies to align with customer demand, the successful development and market acceptance of our products, competition in the market for such products, the product and channel mix, component costs, freight and logistics costs, manufacturing efficiencies, and other risks detailed in our annual report on Form 10-K for the year end December 31st, 2020, and quarterly report on Form 10-Q for the quarter ended June 30th, 2021. The risks and uncertainties could cause actual results to differ materially from those in the forward-looking statements which may be made during the call. It is now my pleasure to turn the call over to Tom Stanton, Chief Executive Officer of AdTrend. Please go ahead, sir.

Thank you, Dee. Good morning, everyone. We appreciate you joining us for our pre-release announcement for Select Third Quarter Financial Results. With me today is AdTrend CFO Mike Fogliano. Following my opening remarks, Mike and I will take any questions that you may have. The preliminary results for the third quarter that we will discuss during this call are subject to change as management and our external auditors have not completed our normal quarterly closing and related review procedures. Final results for the third quarter will be published on November 1st, followed by a call on November 2nd. Let me start by saying that we are seeing unprecedented demand for our solutions. During Q3, we recorded the highest order bookings for any quarter in our history. Bookings were up 43% year-over-year with a book-to-bill ratio of 1.43 for the quarter. This increased demand has been consistent throughout the year with a book-to-bill ratio of 1.34 for the first three quarters of this year. The order growth rate was well balanced across our growth areas of fiber access platforms, in-home service delivery platforms, and SAS applications. These bookings included the first large order of our new Tier 1 fiber customer in Europe and our first order for RDOF-related fiber access deployments with our Tier 1 MSO customer here in the U.S. In addition to the strong bookings during the quarter, we secured two new Tier 1 fiber operator awards in Europe. Both Tier 1 customers are new customers to ADTRAN. In addition to these awards, We have several additional large fiber access opportunities that we expect to close out soon. The demand we see in the U.S. and Europe continues to be aided by the unprecedented funding for fiber-based broadband in these markets, along with technology upgrade cycles and high-risk vendor swap-outs. In the U.S., a portion of the $9.2 billion in broadband funding from Phase I of the Rural Digital Opportunity Fund has started to get distributed to the winners of this auction. In addition to RDOF, much larger investments in fiber-based broadband are expected over the next five years due to funding from the American Rescue Plan Act and the proposed infrastructure bill. These funds are primarily targeted towards regional service providers where AdTrend is seeing tremendous growth. In Europe, over $35 billion in public funding has been pledged for expanding high-speed broadband along with a rapidly growing base of private investments, including in the UK and Germany, where ADTRAN has a strong presence. In addition to increased funding, we continue to see a shift away from high-risk vendors across Europe. With ADTRAN's industry-leading tech gig fiber access portfolio, we are well-positioned to serve these customers. Looking at the preliminary Q3 financials, revenues for the quarter is expected to be $138 million, up 4% year-over-year. This revenue level was held back due to supply chain disruptions across our industry. Non-GAAP gross margins is expected to be 34.6% and non-GAAP operating losses is expected to be 2.6 million. Our revenue for the quarter fell in the lower end of the guidance range that we provided during the Q2 earnings call, while the gross margins and profitability were lower than we expected. We provided a broader guidance range for Q3 than typical due to the strength in product demand and uncertainty in component supply. As noted earlier, the demand side exceeded our expectations while the component supply and supply chain expenses worsened as we progressed through the quarter. Excluding additional supply chain constraint-related expenses in the quarter, gross margins were within our third quarter guidance range. The supply chain challenges facing our industry are multifaceted, including rising costs for semiconductors, increased expedite fees to pull in components due to extended lead times or decommits, sourcing of components from higher third-party sources, and increased freight expenses. We do expect the supply shortages and freight expenses to improve in the first half of next year. On the inventory side, we decreased our finished goods inventory from the previous quarter while increasing our raw materials inventory as we built up supply to minimize further disruptions to our supply chain. Looking ahead, we believe these challenges are peaking during the second half of this year and begin to normalize by mid-2022. We expect the impact on AdTrans results to be temporary given the future supply outlook coupled with strong demand for our products. In summary, the demand for our solutions is at an all-time high, and we expect that demand to continue given the broadband investment tailwinds, our competitive position, the ramping of our existing customer demand, and new customer awards. As you would expect, we are working closely with our customers to fulfill required demand, and we remain in good standing with all of them. In short, our long-term strategy remains unchanged, and the outlook for our business continues to grow. Looking at the fourth quarter, we expect a similar supply environment as to that that we saw in the third quarter, and although we expect bookings to remain robust, revenue is expected at this point to be similar to the Q3 levels. We will provide additional details and an update on our earnings call November 2nd. With that background, I would now like to open up for any questions that you may have. Dee?

Thank you, sir. At this time, if you would like to ask a question, simply press star, then a number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from the line of Michael Genovese,